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India’s shock cash ban of 2016 – counting the cost of Modi’s master plan

Photo: pixabay.com

Everyone in India remembers where they were on 8th November – and exactly how much cash they had in their wallets at the time. Abdul Qadr was flicking through TV channels at home and waiting for his wife to serve dinner when his attention was caught by a breaking news bulletin. “I had 5,000 rupees [£60], all in 1,000s and 500s,” he says. “When I saw the announcement, I was very worried.”

The news was that prime minister Narendra Modi had abolished 500 and 1,000 rupee notes, rendering 85 percent of the cash in circulation in India unuseable with immediate effect.

In a surprise address, Modi said that replacing the bills with new 500 and 2,000 rupee notes was the best way to crack down on India’s untraceable, untaxable “black economy”, which is estimated to be worth $460 billion, almost a quarter of India’s total GDP. “The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper,” he said.

Customers flock to exchange discontinued notes at a bank in Allahabad, Uttar Pradesh, 12th November 2016. Photo: Rajesh Kumar Singh / AP / PA Images

Indians would have 50 days to deposit or exchange their notes at the bank, but would have to show evidence for how they came by the money, on pain of investigation by the tax authorities. It was a bold move, intended to flush out those operating outside the tax system and to force people to use traceable electronic banking systems. It would also help wipe out the forged currency which Modi claimed is used by India’s “enemies from across the border” to commission terrorist acts.

Pandemonium ensued. Banks, which had been kept in the dark about Modi’s policy until the very last minute, began accepting deposits of the old notes on 10th November, but then closed for several days to retool their systems to deal with the change. The country’s ATMs were also closed as they had to be recalibrated to take the new notes. When the ATMs reopened they were emptied of cash within hours, and then could not be refilled as the government had not printed enough of the new currency.

“The printing of 2,000 rupee notes had already started before the announcement, but could not be done on a larger scale, as the secrecy of the whole thing would have been leaked out,” says DS Malik, a spokesman for the finance ministry. When the banks reopened they imposed cash rationing, limiting withdrawals to 2,000 rupees [£24] a day. Long queues formed around every branch in the country.

Nobody had any cash to spend. Nobody was buying anything. For three days we were living off scraps”—Abdul Qadr

Smart citizens saw the writing on the wall and found ingenious ways around the cash crunch. Train tickets, hospital bills and a few other services could still be paid for with old notes for 72 hours and on the day after Modi’s announcement, first class tickets for India’s longest train journey, from Dibrugarh to Kanyakumari, were sold out for the next four months, as people scrambled to use up their old notes with the aim of getting refunds in new money later. Meanwhile, wealthy businessmen complained they didn’t have enough change to buy themselves a cup of tea, and women reported cases of domestic violence after telling their husbands about their secret cash savings, hidden away from their spouses for a rainy day.

For Qadr, the announcement meant an immediate downturn for his business, selling spices in the hills of Coorg in southern India.

Abdul Qadr in his Coorg spice shop

“After the announcement people stopped coming,” he says. “Nobody had any cash to spend. Nobody was buying anything. For three days we were living off scraps. No one was accepting old notes. The day the bank opened I started queuing at 8.30am and had to wait till 4pm to withdraw cash. I was very angry. This was my own money. Why should the government decide how much of it I can use?”

During those few days while the banks were closed and ATMs were not dispensing notes, the entire Indian economy – in which almost all transactions take place in cash – came to a near halt. Weddings were postponed because daily withdrawal limits meant that paying caterers, florists and venues was impossible. Funerals were stopped mid-ceremony as fuel for cremations was in short supply. Patients reported being turned away by doctors because, despite government orders, hospitals were refusing to take old notes.

Newspapers reported dozens of people around the country dying while queueing up for cash in the sweltering heat.

 

The father of chaos?

Anil Bokil, the man who has been widely credited in the Indian and international press with having dreamt up Modi’s demonetisation policy, believes that India is on the cusp of a taxation revolution.

I meet him at a bus station in Mumbai, where he has a few hours to kill before an overnight trip to his home village in Marathwada, one of the poorest regions in western India. Bokil is a tall, thin man, whose voice gets louder and more high-pitched as he expands excitedly on his ideas. He brandishes a 266-page document, which he claims is the government blueprint for future fiscal policy, and throughout our interview he repeatedly thumps on the document with his fist, saying, “It’s all in here.”

However, he refuses to share the document because, he says, it would pre-emptively reveal the government’s plans. “If you go through how the taxation of the whole world is running, it’s a complete mess,” he says. “We are giving the model. The whole world is going to follow this. This is the only model,” he says.

Anil Bokil, reputed architect of India’s demonetisation plan

Bokil says that he met Modi in 2013, after Modi had been selected by the Hindu nationalist Bhartiya Janata Party (BJP) as their candidate for prime minister. Modi was alerted to Bokil’s existence after the reform advocate had appeared on Aastha, a Hindu evangelical TV channel, talking about his economic ideas. According to Bokil, Modi’s aides gave him a ten-minute window to present his case. The meeting ended up lasting for more than two hours. “He was so silent and so keen to listen,” says Bokil. “Modi was so interested, he listened very well. And while coming out of the room, he said, ‘We’ll be in touch.’”

Bokil and the lobbying group he represents, ArthaKranti Sansthan, have been campaigning for the demonetisation of high-value notes for decades. The organisation started as a group of friends from the Marathwada region who were concerned about India’s extreme levels of inequality and poverty. Its theories are based on the Arthashastra, an ancient manual for kings. Written in Sanskrit over the first millennium BCE by several different authors, it dispenses advice on statecraft, economic policy and war.

Is studying economics required? Not required!”—Anil Bokil

Bokil argues that money has gone from being a means of exchange to a commodity, which is controlled by the nation’s super-rich. “Resources have been converted into money and money is held by only a few people. That’s why there’s such a huge disparity in our society,” he argues. “Money should not remain in possession. It should remain in a current, that’s why it’s [called] currency,” he says.

Bokil is an engineer by trade who has never studied economics. “Is it required? Not required!” he says, listing his plan to resolve India’s fiscal problems. First, he says, is “cash-compression”, a step Modi will accomplish with demonetisation, by squeezing out counterfeit notes and unaccounted, untaxed hoards of cash. The new 2,000 rupee notes, he says, will eventually be demonetised too, leaving mostly small change in circulation for day-to-day transactions.

Next, the majority of payments need to be moved to the digital sphere. Then, every single government tax, except custom duty for foreign trade, should be cancelled. Instead, the government should start taxing every digital transaction; the tax will be collected by the banks themselves who will be paid a commission for doing so by the government. Cash transactions will be tax-free but limited to a maximum of around 2,000 rupees (£24) at a time. The result, argues Bokil, will be a more efficient tax system, which includes everyone. This is a pressing need for a population in which, according to government reports, as little as one percent pay income tax: just 12.5 million people out of 1.23 billion.

The government itself has refused to confirm Bokil’s involvement in the origins of the demonetisation policy – or even that Bokil has met with Modi. And neither the prime minister nor his government have given any indication that Bokil’s plan will be implemented in full. But Bokil argues it is just a matter of time before they do. “Water boils when it reaches exactly 100 degrees,” he says. India, according to Bokil, is at its boiling point, and ready for radical change.

 

The war on cash

Alongside the immediate upheaval of demonetisation came some longer-term changes. Within three weeks of Modi’s shock announcement, three million new bank accounts had been opened. Vendors, even at small market stalls, started accepting mobile payments. The government took note of these changes and changed its spin: the reason for demonetisation was no longer just eradicating the black economy, it was also a step towards creating “digital India” – a modern country that is advanced enough to operate without cash.

The government has pointed to a survey conducted on Modi’s official government app, which showed that 93 percent of Indians supported demonetisation. It must be borne in mind that this group may not be wholly impartial, given that they have downloaded an app promising they will “Never miss out thoughts from PM Modi” and will “Receive personalised birthday greetings from the PM”.

Modi is doing this for the people of India. He will get rid of black money, and that is good for the country”—Prathamesh Shroff, student

Nevertheless, many of the people I spoke to in bank queues said that the short-term pain would be worth it in the end. A typical reaction was that of Prathamesh Shroff, a student I met outside the Churchgate branch of the Bank of India in Mumbai. “Modi’s government is doing this for the people of India,” he said. Others in the queue nodded in agreement. “He will get rid of black money, and that is good for the country. Yes, it is a hassle to stand here every day, but the government’s plan is to make black money white. That means politicians won’t be able to take cash bribes, because there’s no cash any more, and it means big businessmen won’t be able to evade tax. It is a good thing in the long term.”

Modi’s BJP politicans across India sprang into action after the demonetisation announcement, lauding the prime minister for his visionary policy and competing for his favour. On 25th November the chief minister of Goa enthusiastically announced that his state would be the first to go cash free. Four days later, the governor of Punjab announced the northern city of Chandigarh would be the country’s first cashless city, with the exceptionally ambitious deadline of eliminating all paper-money transactions by 10th December. The chief ministers of Gujarat and Maharashtra applauded their first “digital” villages, in which credit cards and mobile payments were apparently outpacing cash transactions.

On the ground, vendors struggled with new credit card machines that were being handed out by banks without sufficient training. In Goa I spoke with fishmonger Laxman Chauhan, who expressed fears that the government would introduce penalties for vendors who did not offer cashless payments. Having never used a computer or smartphone in his life, he worried that he wouldn’t be able to use the credit card reader, that he’d have to keep asking customers to help him, and that they could easily take advantage of him. “We’re not educated. We don’t know how these machines work,” he said. “Anyone can just put any number in there, and I’d never know if I was paid the right amount or not.”

On 11th January 2017, the World Bank downgraded India’s growth forecast from 7.6 to 7 percent, citing the impact of demonetisation. In February 2017, for the first time, finance minister Arun Jaitley admitted that the note ban had caused “an adverse effect” on the country’s economy. But the government stuck to its line, restating that the long-term benefits of the policy would outweigh the temporary struggle of living with less cash. In a show of intent, it made possession of more than ten old 500 or 1,000 rupee notes for “numismatic purposes” punishable with a 10,000 rupee [£120] fine.

A crowded petrol station on 8th November – one of the few places in New Delhi still accepting the withdrawn banknotes. Photo: Manish Swarup / AP / PA Images

Malik claims that 1.8 million Indians are already being investigated since demonetisation because of mismatches between their cash deposits and their tax profiles. “Naturally the government has the right to know where people’s money has come from,” he says. “If you’ve not paid tax on that cash, then you will now have to. The whole purpose is that people will bring money to banks. If you can give a justifiable explanation to the income tax department, then fine. But if you can’t you will have to pay.”

Those who have suffered the most from Modi’s policy are ordinary people. Three months after it was announced, sales in Qadr’s spice shop are down 40 percent. A combination of a persistent shortage of new 500 rupee notes and people’s unease about paying for small-value items with 2,000 rupee notes has hit him hard.

“I earn barely 200 rupees (£3) a day now. Things are very bad,” he says. “I have had to ask my wife’s family for money, just so my two girls can keep going to school. Do you know how embarrassing that is for a man? To ask his father-in-law for money? It’s not that I’m against the government, I want the progress of this country, I am willing to make sacrifices. But how much should we have to suffer to make it happen?”

 

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